Other capital taxes – what are the options?
Last Thursday I had the very great pleasure of talking about tax to smart young people – here and here – at the Social Change Collective alongside Marjan van den Belt and Max Rashbrooke.
One of the questions was if not CGT and we wanted to tax capital more – what are the options? Answered it on the night but as the sharing individual I am I thought I’d do it for you all too.
This version might even be more coherent. Fingers crossed.
To me the options seem to be:
- Net equity tax or risk free rate of return method (rfrm)
- Wealth tax
- Alternative minimum tax
- Land tax
Net equity tax / risk free rate of return method
Susan St John is proposing the net equity tax – or risk free rate of return method for residential property.
This means a notional rate comparable to that a risk free rate of return – say 5 year bank term deposit – is applied to the equity held in residential property. This amount then becomes the income that is subject to tax.
For example if a property has a value of $1million – land $800k building $200k – but has a mortgage of $600k – it has net equity of $400k.
If a rate of return of say 3% is applied to the equity of $400k this will generate taxable income of $12,000. This $12k would then be taxed at the tax rate that applies to that particular taxpayer. Say 33% if top rate individual or trust. 28% if a company.
This $12k would replace any existing taxable income from that asset. That is rent would no longer be taxable and so there would be no associated deductions allowed.
As Susan is only proposing that it apply to residential property there would be no particular problems with getting a valuation to work out ‘net equity’ as land is regularly valued.
There could be issues if the debt that is attached to a property funded other investments and not the property itself. However there are lots of issues with debt and how it is allocated generally – I don’t think that is a deal breaker here.
There are also the issues that I raised in my comments on the officials note. For landlords who are currently charging below market rent this may incentivise rent increases. It may also further disincentivise landlords maintaining their properties as there is no tax benefit for doing so.
However that is more the place of regulation rather than tax.
Interim conclusion: Some technical issues with debt allocation and possible adverse behavioural effects by landlords but quite doable. No issues with valuation.
Max Rashbrooke is proposing a wealth tax on all wealth.
An annual tax of a small percentage of the value of wealth held. As per the previous example – assuming no other wealth was held by the taxpayer – a small percentage – say 1/2% would apply to the $400k and an extra $2000 wealth tax would be payable on top of any other existing taxation.
Unlike net equity tax, this is not a proxy or an alternative calculation of taxable income for income tax to apply to. It is an additional tax on a different base in the same way GST is.
And just like GST it is a form of double tax. Consumption – and GST – is made from tax paid income. That is the same income is taxed twice. It is a feature. The beauty of GST is can also ensure one level of tax is paid when income wasn’t taxed in first place. Say if an untaxed capital gain.
Wealth taxes are similar. If tax has been paid at every level we would get:
For some asset classes such as bank deposits – or possibly foreign shares – this is absolutely the deal as there is no part of the income that is untaxed. In those cases wealth tax seems a bit like over kill/taxation.
For other classes such as shares, investment in small businesses and unleveraged residential rental property where some part of the return is taxed but there is still an element of untaxed capital gain – depending on the rate of tax – a wealth tax absolutely has merit.
For serial entrepreneurship or land banking where the whole return is a capital gain – in a world without the capital gain taxed – this is an absolutely bang on approach.
Assuming this can be got through – maybe with different rates for different types of wealth although that will then bring in issues of debt allocation – the most significant issue will be that of valuation.
This is particularly the case with valuing goodwill in unlisted businesses. To have to value every year would make the valuation industry very rich.
Now I know it is possible for the tax administration to come up with some rules of thumb but having been upclose and personal in the Michael Cullen/Troy Bowker spat on exactly this issue – it is definitely a practical thing that will slow this option down.
Interim conclusion: Need to clarify conceptual basis for including asset classes already fully taxed. Valuation issues likely to be a significant hurdle in practice. But could work.
Alternative minimum tax
Geoff Simmons and TOP are proposing an alternative minimum tax on all wealth. A bit like Susan’s proposal but instead of the rate being applied to residential property it would apply to all the wealth of a taxpayer.
But unlike Susan’s option, instead of the rfrm number becoming the taxable income figure it would be compared to the taxable income that arises under the current tax rules. Tax would then be payable on the higher of the two numbers.
So in our example above if the property was the only source of wealth and currently returned no taxable income, then the $12,000 would be taxed at whatever the appropriate tax scale is.
However by including all wealth this option suffers from the same valuation issues as a wealth tax.
But because it calculates an alternative minimum income level, rather than an additional or alternative tax, there is no issue of double or triple taxation. Its aim is to simply ensure the income that level of wealth should (or is on an imputed basis) be generating is subject to tax at normal rates.
Interim conclusion: Conceptually the most coherent of all the options but significant issues with valuation. Could work though.
This would involve an annual tax of a small percentage of the value of land held. Like a wealth tax it would be a separate and additional tax but unlike a wealth tax it is levied on the value of the land – in this case $800k – with no reference to the debt borrowed to purchase it.
By focussing on land it doesn’t have the valuation issues that a wealth tax or an alternative minimum tax does. Also there are no issues with allocating debt.
It does, however, seem arbitrary to pick on one asset class only. But as this is the asset class that is currently undertaxed by reference to the level of capital gains earned (1)- such an argument doesn’t stress me.
It is, though, the current tax base of local authorities so if central government were to move into their tax base, local authorities’ arguments for a portion of GST could become more compelling.
Interim conclusion: Conceptually the least coherent of all the options. Minimal practical issues. Could definitely work.
The key difference between all these options is that a land or wealth tax is an additional tax separate to income tax. Net equity or alternative minimum taxes, however, are still within the income tax system but trying to get a better measure of taxable income than the status quo.
But they have many more things in common.
Similarities between the options
I think all options will need some form of threshold before they apply. No one – thank goodness – is keen on a family home exclusion. But all have additional complexity and compliance cost so something like $500k threshold for an individual could take out personal assets including a home (and maybe KiwiSaver) for most people. This would then mean the taxes could focus on the top end of the income and/or wealth scale.
May not have cash to pay the tax
None of these options are realisation based. That is they apply irrespective of whether any cash – or income other than imputed income – has been generated from the assets or wealth. Now I know that Susan St John explicitly doesn’t care about that as she feels then the property should be sold if that is a problem for the owner. I am guessing that is also the view of TOP as it is only cash poor pensioners that can get any deferral.
I get why economists might not care about this and/or see it as a design feature to encourage more efficient use of assets but not sure that is how the general public would see it. Even with a threshold.
As an example the Tax Working Group only considered rfrm on residential rental properties as it was only that group that would have the cash to pay it.
Impact on Māori collectively owned assets
Māori currently own a tiny fraction of the land they did at the time of the signing of Te Tiriti. And the settlements they have received were only 2% or so of the value they lost through crown action. (2)
Now the deal with the settlements was that they were to be full and final and that there are no special tax rules. But any tax isn’t linked to cash income earned and targets their assets or wealth, even if not the basis of a potential contemporary Waitangi Tribunal case, will be considered more bad faith action from the Crown.
As a woke Wellington snowflake I would have no problem exempting assets held collectively under a Māori Authority. Not for tax policy reasons but as a way of preventing further injustice. But as the equivalent noise showed with capital gains, this would not be a universal view.
Would raise shed loads of money
Rfrm on residential rental property only was found to raise a $1 billion (3) a year more than the current taxation of residential rental property. This was even when the extension of the brightline test to 5 years and loss ringfencing was allowed for. That was with a rate of 3.5% which was the 5 year bank term deposit rate at the time of the report.
$1 billion. Every year.
Let that sink in.
Final conclusion on all options
So all options even with quite modest rates could raise seriously useful dosh for the Government.
But this money wouldn’t come from thin air. Like capital gains it comes from people of means. A section of whom – much like with capital gains – are well organised, connected and resourced.
So I am not holding my breath for any of these being adopted by a major party any time soon. No matter their merit.
(1) Paragraph 60.
(2) For readers interested in more background. Here is the officials paper on the subject for TWG and here is mine as I didn’t feel officials went far enough.
(3) Paragraph 41
Tax and politics (2)
Kia ora koutou
Andrea has handed over to us on the youth wing of the Andrea Tax Party for this week’s blog post so we can set out our views on tax.
What she proposed is ok but we can’t help feeling it was more than a little influenced by her Gen X, neoliberal, tax free capital gain and imputed rent earning privilege. A bit like the recent Budget – more foundational than transformational.
But we have also worked out that – by definition – any capital gains tax that applied from a valuation day or worse still grandparenting would have hit any gains our generation would have earned rather than the gains that have arisen to date.
And don’t get us started about the exemption for a family home. The only members of our generation who will buy a house – with exorbitant mortgages – are those whose parents can help financially. Again more revealed Gen X privilege.
So we aren’t super sad it is off the table.
TOP are still promoting an alternative minimum tax and CPAG want to tax a risk free return on residential property. Both reasonable and we may yet move over to them but it the meantime we are seeing if we can do better.
This is what we are thinking:
Land tax on holdings over $500,000. Limited targetted exemptions.
This was a proposal under National’s tax working group (1) in 2009/10 that was also then ignored by the Government at the time.
The deal is that there would be a tax on the value of land. That’s pretty much it. There could be exemptions for conservation land, maybe land locked up for ecological services and Maori freehold land.
The last one might be controversial but we are completely over the race baiting that goes on anytime different treatment for Maori assets comes up. Settlement assets were a fraction of that taken by the Crown and until such time as Maori indicators – not the least the prison population – gets anywhere near non-Maori, we are open to different treatment to improve outcomes.
As this tax is certain what tends to happen is that the price of land falls by an NPV of the tax. The effect therefore is the same as a one off tax on existing landowners. And to be honest – we’d be open to that. Seems much lower compliance cost something Andrea and her friends get so excited about.
Now we know there is an argument that because of the effect on existing land owners – this is unfair.
However to a generation locked out of land ownership in any form due to the high prices – we are deeply underwhelmed by that argument. It was equally unfair that existing owners got the unearned gains over the last 10 years or so. And yes they might not be the same people who are affected – but again – underwhelmed.
So all holdings of land over $500,000 – other than those mentioned above – will be subject to a land tax. And honestly maybe we have the threshold too low.
GST – no change
This one causes us pain.
We really want to drop the rate as poor people spend so such more of their income than rich people. But rich people who might be living off tax free capital gains still have to buy food – and they spend more on food than poor people. So a cut in GST is – in absolute terms – a greater tax cut for the rich.
However the prevailing wisdom that increases in GST don’t matter if you increase benefits is also BS. This is for a couple of reasons:
Benefits – until this Budget kicks in – are increased by CPI but low income households have higher inflation than high income households.
Benefit increases do not survive National Governments. The associated rise in benefits from the GST introduction were unwound by the benefit cuts in 1992 and more recently benefits were eroded through changes to the administration by WINZ.
And even Andrea witnessed the changed behaviour of WINZ as she was in receipt of the Child Disability Allowance from 2007 to 2012. She went from having a super helpful empathetic case manager to having the allowance stopped when they lost her paperwork.
If anyone wants to argue instead that the last government increased benefits – bring it on – because if that is how Andrea was treated by them just imagine how WINZ behaved to people who weren’t senior public servants.
So we are recommending no change here unless there was some way of making it progressive.
Inheritance tax on all estates over $500,000
Andrea might be fixated with taxing people when they are alive but all this means is that the huge untaxed gains that have been earned get to be passed on to the next generation. And yes that might be some of us but anything to reduce the wealth inequality in New Zealand has to be considered.
We take Andrea’s point about this also applying to death of settlors (and maybe beneficiaries) but all estates over $500,000 will be taxed at the GST rate as it is inherently deferred consumption.
Make the personal tax scale more progressive
When Andrea started work in 1985 – as an almost grad – she earned $15,000 and paid $5,000 of that in tax. That is an average tax rate of 33% and probably a marginal tax rate of something like 45%.
She had no student loan because University was free. In fact she also got a bursary of about $700 three times a year. There was no GST.
Grads in 2019 start on about $50,000. Income tax is about $9,000. This is an average tax rate of about 18% and a marginal tax rate of 30%. Student loan repayments are 12% and GST is probably about 10% allowing for rent and savings. This gives a marginal tax rate of 52% which will then climb to 55% if they ever get a well paying job. So 10% higher tax than 1985 on pretty middling incomes.
We get that including student loans might upset Andrea’s tax friends but we are also guessing none of those people have 12% of their earnings going to Inland Revenue every pay day.
Team if it looks like a duck and quakes like a duck….
In fairness we also know her father in 1985 had a marginal tax rate of 66% although he got deductions for life insurance and ‘work related’ expenses. Now parents top out at 33% plus say 10% for GST – 43%.
We guess then parents should pay more but 1) not everyone has middle class parents 2) declining labour share of GDP and 3) the ones who can are already helping us and that is a recipe for entrenched privilege.
So our policy proposal is:
1) Make the changes Andrea suggests to stop all the tax avoidance and tax evasion.
2) Extend the bottom tax rate of 10.5% to $40,000
3) Increase the next tax rate to 25% from $40,000 to $70,000
4) Bring in a new threshold of 40% at $100,000
Or something like that.
The bottom threshold needs extending to include anyone who can still receive any sort of welfare benefit while also earning income. That reduction in tax then needs to be clawed back for higher earners and really high earners just need to pay more.
Emissions trading scheme
And please if there isn’t going to be any sensible carbon tax or any environmental taxes could we at least put a proper price on carbon in the Emissions Trading Scheme.
It is only human life on this planet we are talking about.
We think that is it for us. Andrea and her Gen X biases will be back next week.
Young friends of Andrea
(1) Page 50
Two men one press release
Let’s talk about tax.
Or more particularly let’s talk about Oxfam’s recent press release on inequality and tax.
Now dear readers when I moved to weekly – hah – posting it was because this blog was supposed to be my methadone programme. Getting me off tax and on to other issues. So when I posted last night – after having posted 3 times last week – I gave myself a good talking to. This had to stop. One post a week was quite enough to keep the cravings at bay. To continue in this vein would risk a relapse.
But this morning while I was getting dressed my husband came and turned on the radio. Rachel LeMesurier from Oxfam was talking about inequality and then she talked about tax and then Stephen Joyce came on and then he talked about tax and then he talked about BEPS.
Just one more little post won’t hurt I am sure and I’ll cut down next week honest.
Oxfam has compared the wealth of 2 New Zealand men Graham Hart and Richard Chandler to the bottom 30% of all adult New Zealanders. Now the inclusion of Richard Chandler seems to be a rhetorical device as from what I can tell he hasn’t lived here since 2006. So very unlikely to be resident for tax purposes.
In the interview Rachael Le M also made reference to the tax loopholes that support such wealth. So using what is public information about Graham Hart and what is public about the tax rules I thought I’d make a stab at setting out what these ‘loopholes’ are.
Now first dear readers please put out of your head anything you have heard about BEPS or diverted profit tax or any of the ways that the nasty multinationals don’t ‘pay their fair share of tax.’ None and I repeat none of this is relevant when dealing with our own people. It might be relevant for the countries they deal with but not for New Zealand. I am hoping that officials will also explain this to new MoF Steven Joyce as when he came on to reply to Rachael – he talked all about BEPS. Face palm.
Graham Hart is a serial business owner. Buying them sorting them out and then selling off the bits he doesn’t want all with a view to building up a Packaging empire. A Rank Group Debt google search also indicates that a substantial proportion of all this buying and selling was done through debt. And at times quite low quality debt which would indicate a proportionately higher interest rate. A number of his businesses are offshore.
So then what ‘loopholes’ – or gaps intended by Parliament – could Mr Hart be exploiting?
The first and most obvious one is that there is unlikely to be any tax on any of the gains made each time he sold an asset or business. The timeframes and lack of a particular pattern – as much as Dr Google can tell me – would indicate that the gains would not be taxable.
The second is that income from the active foreign businesses will be tax exempt and any dividends paid back to a New Zealand will also not be taxed. Trust me on this. I’ll take you all through this another day.
The third relates to debt. Even though it assists in the generation of capital gains and/or the exempt foreign income it will be fully deductible. Now because of the exempt foreign income there will potentially be interest restrictions if the debt of the NZ group exceeds 75% of the value of the assets. A restriction true but not an excessive one given exempt income is being earned.
Now also in Oxfam’s press statement is a reference to a third of HWIs not paying the top tax rate. I am guessing some version of one and three plus the ability to use losses from past business failures is the reason.
Unsurprisingly Eric Crampton of the New Zealand Institute is not sympathetic to Oxfam’s views and points to our housing market as the main driver of inequality. So then in terms of tax and housing the other tax ‘loophole’ then would be the exclusion of imputed rents from the tax base.
Now one answer could be Gareth’s proposal. That is if someone could explain to me how to tax ‘productive capital as measured in the capital account of the National Income Accounts’ in a world where tax is based on financial accounts according to NZIFRS.
The second could be a capital gains tax even on realisation and the third some form interest restriction or clawback when a capital gain is realised. Oh and taxing imputed rents.
How politically palatable is this? Not very given National, Labour, Act, New Zealand First and United Future are all opposed to a capital gains tax – at least Labour for their first term.
But then maybe it is stuff for Labour’s working group. Will be interested to see this all play out.
Let’s talk about tax (and imputed rents).
In one part of the now infamous interview between Gareth Morgan and Paul Henry; when Gareth is trying to explain to Paul that Paul owning a big house or a flash car did have value to Paul – Gareth is talking about imputed rents.
Michael Cullen’s tax review in 2001 – the one that had Shirley Jones as a member that wasn’t the mother of David Cassidy – produced an interim issues paper. In that paper from page 37 there is a proposal to tax imputed rents. I will define it in a minute promise – currently just doing the preamble flow. The media and news – coz in those days people didn’t get their news anywhere else – went absolutely nuts. There was a line doing the rounds that the Beehive’s switchboard was jammed following the release of the issues paper – and that was just from the 9th Floor (HC) to the 7th (MC).
I don’t think Helen Clark’s government could distance themselves from it fast enough.
So what is an imputed rent? Told you I would get there in the end. The way I like to think of it is the rent you save to the extent you own your own place. That value is then income to you as is the case with the dividend rules where a shareholder lives rent free in a house owned by the company.
Strictly speaking the ‘correct technical’ analysis has you both paying non- deductible rent and receiving taxable rent. In the same way renters pay non-deductible rent to landlords for whom it is taxable income. In this analysis you are both renter and landlord.
Yep I prefer my way too.
So it is a benefit or a tax break that owner occupiers get that renters don’t get. And it has been there for like EVAH so no one really realises. Except in their heart they do. Imputed rents is the basis of the received wisdom that you should always pay off your mortage ahead of making other (taxable) investments.
Now the thing is that strictly speaking under the ‘correct technical’ analysis if you start taxing the income you need to also allow deductions. But I am not sure if our friend the private and domestic exclusion for deductions would let it thru.
This isn’t a problem for TOP as their tax will be based on productive capital as measured in the capital account of the National Income Accounts. Ok good. There is though the small matter that nothing else in the tax system is actually based on this concept . So maybe – just maybe – there could be some tax design issues.
Now being the solutions focussed individual that I am – I thought I’d put together another way of taxing imputed rents. Yes I know there is more to the TOP tax policy than this – but there are limits to my powers. I also can’t do a blind thing about political acceptability either – so I am sticking with what I know.
How to tax imputed rents in four easy steps.
Step one. Divide the value of your mortgage by the value of your property. Council valuations will be fine.
Step two. Go to the MBIE website and look up your area, number of bedrooms and find the potential rent for your property. There are three bands. Take the median one. Why? Made it up. No one can be trusted not to self assess the lower band and I can’t cope with the arguing.
Step three. Take the rent in step two and multiply by 52 weeks or how ever long you have lived in your property. If no mortgage put this number in your tax return in the rents box. Joint owners – yes you can divide it by number of owners. Put that number on your tax return.
Step four. Those with mortgages who are still playing. Multiply step one’s number by step three’s number. This is the amount you aren’t paying tax on. Deduct it from the full amount in step three and put it on your tax return. Yes joint owners can divide here to.
Of course it still suffers from the problem all made up or presumptive taxes do that there hasn’t been any cash come in to help pay the tax. But I would hope – to paraphrase one of my commentators – it was more intuitive and less weird to the punters than something based on a percentage of value. Even if the outcome is broadly similar.
Now of course the economists may hate it. But as economists don’t have to explain things to clients or taxpayers – give the accountants this one.
I wouldn’t normally create an entire post for a commentator. But hey it is my blog and not everyone is dedicating themselves to overhauling our country in a socially progressive way. Also I did devote an entire post to them so only seems ‘fair’ – as much as I dislike that term – to do the same for the response.
There must be a technologically prettier way to reproduce his comments – but until number one son comes home for Xmas – this is the best I can do.
‘But if, baby, I’m the bottom you’re the top’
Let’s talk about tax.
Or more particularly let’s talk about the recently announced tax policy of The Oppportunities Party – TOP. They are proposing to impose a tax on a deemed or imputed return on capital to the extent tax of that level is not paid already. Kinda like a minimum tax. With proceeds going to fund income tax reductions on labour income.
TOP is a party set up by millionaire businessman and commentator Gareth Morgan to change the political discourse in New Zealand. Your correspondent is particularly fascinated as her eighteen year old self voted for a party set up by a millionaire businessman and commentator Bob Jones who set out to change the political discourse in New Zealand. I was righty then and lefty now and both parties were set up to scratch itches on the body politick.
Bob Jones got no seats but he did get 20% of the vote. Today that would be almost the Greens and New Zealand First level of representation.
Now the New Zealand Party never really got into policy much beyond Freedom and Prosperity. TOP however is much geekier and actually plans to release policy ahead of even deciding to register. And their first released policy is one on tax. And and it seeks to tax capital more heavily and lessen the tax on labour. Woohoo. Speak to me baby.
Now New Zealand’s tax system is one designed by economists, drafted by lawyers and administered by accountants – so what could possibly go wrong. Nonetheless all three groups have their own languages and blind spots. It is a marriage that mostly works but only if all three groups keep their eye on the policy development and respect each other’s strengths.
Another perspective is that of the high level ‘strategic’ people versus the detail people. Again each have their strengths but also the ability to talk past and frustrate the snot out of each other. Working at Treasury I was surrounded by the former. To the younger members of this cohort I would always consul them to stay with the process – even when it became boring. As because detail people speak last – they speak best. And what eventuates may not be what the high level strategic people with the higher number of hay points actually had in mind.
In tax a classic example is the Portfolio Investment Entities rules. If you look at the early high level papers it was all about taking away the tax barriers to diversified pooled investment in shares. What we ended up with was the ability to have cash PIEs, land PIEs and single equity investments. Giving us almost a nordic tax system with the taxation of savings. So somewhere the high level strategic people disengaged or conceded to technical design issues that gave some unintended and quite important consequences.
All of this came back to me when I read the TOP tax policy. Clearly designed by economists – and cleverly so – but sadly lacking in input of the other two tax disciplines. So as a tax accountant who is regularly mistaken for a lawyer I thought I’d step up and help them out. Here goes:
General aka random irrelevant points that say more about the reviewer than the reviewee.
One. While Gareth didn’t – I enjoyed the envy tax reference. Coz does this mean taxing labour is a pity tax, or a tax on despair or a tax on barely getting ahead? I am all in favour of taxing envy. Let’s also tax greed, sloth, lust and the rest of the hell pizzas. There’s no risk of that tax distorting those human behaviours after all.
Two. For readers who have been keeping up, a regular whinge of mine is how we effectively give deductions for loss of capital when gains are not taxed. This would be overcome through the minimum tax on wealth (or assets). So under this proposal such capital losses would effectively become valueless. Rejoice.
Three. If you are going to get a bunch of extra money – instead of reducing taxes on labour income – the tax welfare interface is IMHO a much more worthy candidate for any spare money. But maybe the universal basic income is the next cab off the rank.
Specific points that might actually be helpful
One. It is true property ownership is a feature of the rich list but so is serial entrepeneurship – Graeme Hart, Diane Foreman and someone Morgan. Now a key part of entrepeneurship is loss making in the early years. There is some attempt to address this with a potental deferral of up to three years of the tax. The question I have is this long enough? Isn’t Xero still loss making?
Now the received wisdom is that innovation is a good thing hence all the fricken R&D subsidies. With a much less benign tax system for innovation – will this mean that some of the dosh is simply recycled back to small firms via Callaghan? And so maybe not all will go to reduce taxes on labour income?
Two. Is it a tax based on wealth or assets? Both are mentioned in the proposal but they aren’t the same. Capital is used a lot in the proposal and depending on whether you are talking to an accountant or an economist can mean either assets or wealth. But here is why it matters. Assets is the total of all the stuff you have legal title to, wealth is the amount that no one else has claims on. And the difference between the two is usually debt but could also be trade creditors, intercompany advances or provisons or accruals. Not all of these generate tax deductions.
So if it is a tax on assets, is it fair to tax people on stuff that other have claims on? I doubt it. A bit of language tightening here would be cool.
Three. Valuation. For property and things like shares market valuations are not too hard. Businesses – however – wow. There will be what the financial accounts say but then there will be what someone is prepared to pay. Usually some multiple of Earnings Before Interest and Tax – EBIT. And what about valuing implicit parental guarantees from non- residents. The choice then is to be completely fair between all forms of wealth and be a bit arbitrary and compliance cost heavy or not but not tax all forms of wealth evenly. Up to you.
Four. Who owns the wealth? From the vibe of the proposal I would say the intention is that the ultimate owner of the wealth pays the tax. However structurally wealth is likely to be held through many trusts, holding companies , limited partnerships and possibly in individuals own names. This is not insurmountable for design but will involve complicated grouping rules and possibly flows of notional credits to make it work. Perhaps have a look at the actual tax rules for imputation, mixed use assets or cashing out R&D losses to see if you still have the intestinal fortitude for what it will mean to make this work.
Five. Compliance costs. Now I don’t want to overplay this but comforting assurances that if you’re paying enough tax you’ll be fine means – two sets of calculations. The old rules will need to be applied which are not compliance lite and then the new rules willl need to be applied. And after addressing the issues above – they won’t be any picnic either.
But good luck. Perhaps in practice a tax solely on property might work. But after working through their policy I can’t help feeling all this is why countries just cut their losses with a realised capital gains tax.
And thanks for playing. First policy – one on tax – still impressed.